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24 Feb. 2010 | Comments (0)

For shareholders and institutional investors, the silver lining in the controversial Citizens United v. Federal Elections Commission U.S. Supreme Court decision is that “corporate democracy” is well and alive and corporate disclosure is key to its success. For corporations and some conservative advocacy groups, some believe the decision will allow companies to raise issues that could affect the prosperity of their employees and shareholders. Many groups like the Business and Industry Political Action Committee (BIPAC) also challenge the notion the decision will open the floodgates on political spending. However, there are three areas management, directors and shareholders agree will be most affected by this ruling: business decision-making, disclosure of political contributions and disclosure oversight. For those not familiar with the details of the case, here it is: The 5-4 U.S. Supreme Court ruling on Jan. 21 allows corporations to advocate for politicians and political issues without limits, thus stripping a major component of the McCain-Feingold campaign finance reform measure that has been in place since 2002 and overturning older law that prohibited corporations from using general treasury money to support or oppose a candidate. In the majority opinion, the Court also ruled that corporate democracy exists, thus validating the rights of shareholders who want more access to the proxy. Additionally, the Court in a separate 8-1 vote in the Citizens United case upheld requirements that electioneering communication, such as the 90-minute Hillary movie that was the focus of the case, funded by anyone other than the candidate must disclose who is “responsible for the content of this advertising” and must display on screen “in a clearly readable manner” for at least four seconds the name and address or website of whoever funded the communication. [See a good analysis of this vote on SCOTUS blog.] “What was extremely important in this decision was that they [the Court] recognized the constitutionality and importance of disclosure to shareholders,” said Bruce Freed, president of the Center for Political Accountability. “Directors will have to ask more detailed questions about policies [of political contributions] and particular expenditures.” Shareholder groups and institutional investors have joined forces to address the fallout from the decision. One group, the Center for Political Accountability (CPA), had already been working on a public company contribution disclosure campaign. The organization is also collaborating with The Conference Board Governance Center to publish a handbook on political spending for public companies, due out in June. The Governance Center has been researching this topic since 2008 and in April 2008 published an Executive Action Report titled Political Money: The Need for Political Oversight [Read report, (membership required)], which was written by Bruce Freed, CPA president, and Karl Sandstrom, of counsel with the political law practice of Perkins Coie. Related to the political contribution disclosure issue, Freed will take part in a Governance Center-sponsored Investor Summit April 13 on the topic in Washington, D.C. (More on this event in later blog posts.) “Companies will be under pressure to spend [on political campaigns] than ever before,” he said. “Trade associations and conduits will be used to a great extent. The U.S. Chamber of Commerce is going to go to companies for more money for general purposes.” Not so fast, says Greg Casey, BIPAC president and CEO. “Don’t look for solution-minded business leaders to spend fortunes on television ads supporting someone else’s political priorities,” he said. He cautioned against expectations the ruling would open the flood gates of money that would “take us back to the last century where big money, big television, and centralized political parties ruled public opinion.” [Read press release.] As for disclosure, the CPA has already signed up nearly half of the Standard & Poor’s 100 to publicly disclose contributions to corporate funds and trade associations to be used for political purposes, according to Freed. Some of those early adopters include Microsoft, Time Warner, Aetna, Merck, and Hewlett-Packard. “Our aim is to have the S&P 500 adopt policies and procedures for review and approval of [political] expenditures,” he said. “They post the information on their Web site annually.” Casey believes these companies are making a huge mistake by politically correct and disclosing what is not required by law. "A lot of these requests for disclosure are not for noble reasons," he said. "The bottom line of such disclosure tends to chill participation in the process." His organization is worried that companies will wind up disclosing too much, which raises more questions, expectations and liabilities. Besides, "by law companies already disclose what their PACs spend with the FEC." During a Feb. 4 press briefing (See press release.) on the Citizen United decision, members of shareholder groups and institutional investors –, Lens Governance Advisors and the New York City Public Advocate’s office – as well as the CPA pledged a three-pronged action plan:
  • Direct engagement of management at public companies that leads to disclosure of a company’s soft money contributions, trade association payments and other payments to political organizations; disclosure of a company’s policies and procedures for political contributions and expenditures; identification of people involved in decision-making for such contributions and expenditures; and board oversight of the whole process.
  • Outreach to the SEC through the Investor Advisory Committee and a direct petition requesting agency rulemaking in the area.
  • Write a letter to Congress asking lawmakers to ensure that shareholders have all the tools needed to make sure such political spending does not erode shareholder value.
Without such action, New York City Public Advocate Bill de Blasio fears shareholder interests could become secondary to the interests of the politicians and company management. “It could start to warp the corporate decision-making process away from shareholder interests,” de Blasio said during the press briefing. “I fear a corporate spending arms race.” It is that fear that is driving Democratic leadership on Capitol Hill (Sen. Charles Schumer of New York and Rep. Chris Van Hollen of Maryland) to propose a legislative framework to undo most of the Supreme Court decision. In a release issued Feb. 11, Van Hollen and Schumer spelled out the following framework that would include: •    Ban on expenditures from foreign interests •    Ban on expenditures from federal contractors •    Ban on expenditures from TARP recipients •    Disclosure to the public through enhanced reporting through the FEC and Lobbying Disclosure Act •    Disclosure to shareholders directly and through the SEC •    Stand By Your Ad (CEO and donor disclosure) •    Lowest Unit Rate (air time for candidates and party committees) •    Coordination Rules (tightened between outside groups and candidates).
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin


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